GLOBAL REPORT—Despite Portugal and Spain seemingly squeezed by recession, their hotel industries remain upbeat, with sources saying growth will derive from asset repositioning and increased demand from sun-starved northern Europeans.
The World Travel & Tourism Council’s “Travel & tourism economic impact 2013” report stated tourism’s direct contribution to Portugal’s gross domestic product in 2012 was €9.4 billion ($12.8 billion), a figure predicted to rise 0.4% by year-end 2013 and 2% annually to 2023.
The WTTC’s equivalent report on Spain has tourism aiding 2012 GDP to the tune of €57.1 billion ($77.6 billion). Although that figure is expected to fall by 1.2% by year-end 2013, the figure is projected to increase 1% annually through 2023.
Gains in the tourism sector are pronounced when juxtaposed against more sobering statistics detailing the countries’ respective economic performance.
According to a January 2013 report, “Thriving or surviving: European cities hotel forecast 2013” from PricewaterhouseCoopers, “The Spanish economy continues to deteriorate at an alarming rate, although it has yet to be felt in the Barcelona hotel market. Nationally unemployment has reached 26.2%, with Greece the only peer.”
PwC’s hopes for Portugal appear no better, with the report stating that praise for the country’s structural reforms has not prevented the recession from deepening. “The economy is 3.4% smaller than it was a year ago (Q3 2012 data), and unemployment has reached 16.3%. We expect the recession to continue next year, with the economy to contract) by a further 1.1%.”
“In Portugal, two-thirds of hotels are independent. This brings greater difficulty when we compete externally, when we need to decrease costs and manage supply or when we negotiate with international players, such as Expedia or Booking.com. We believe consolidation is required. The fact that many hotels are already falling into restructuring funds might help,” said Ricardo Sousa Valles, senior manager of strategy and operations for PwC’s Lisbon office.
“Lending rates have decreased significantly, (while) required levels of shareholder funds have increased dramatically for new projects. Most transactions have been performed by restructuring funds, buying hotel debts from banks and turning them into capital. This activity is expected to continue,” he added.
Spots of success
Barcelona is a notable success story in Spain.
According to Hotel News Now’s parent company STR Global, the city—which has a global market, as opposed to Spanish capital Madrid’s largely domestic one—showed year-to-date October 2013 occupancy at 75.1%, even higher than its 2007 pre-recession figure of 74.1%. Over the last five years, revenue per available room for year-to-date October also has steadily increased to €91.18 ($120.69), an increase of 3.5% compared to the prior year period. www.strglobal.com
Gilberto Jordan, board member of real estate investment management company Selecta SA, praised Barcelona.
“It’s probably the most attractive regional capital city. The south of Spain and the islands (Canary and Balearic) maintain competiveness due to large customer bases, big players, international promotions and price-quality,” he said.
Meanwhile, Madrid’s occupancy was at 62% year to date through October, down from 69.1% in year-to-date October 2007 and even from 2012’s figure of 64.9%. The city’s RevPAR is €51.95 ($68.72) year to date through October, a decrease of 8.1% from the prior year period.
Several major cities in Portugal also reported strong performance in euro terms.
Lisbon’s occupancy was up 4% to 67.9% through the first 10 months of the year, which is nearly on par with its year-to-date October 2007 figure of 68.1%. The city’s RevPAR is also strong, up 6.4% to €59.21 ($78.36), according to STR Global.
Year to date through October, Porto, Portugal’s second largest city, posted an occupancy gain of 7.6% to 62.4% and a RevPAR increase of 7.9% to €38.59 ($51.11), which is still well below its 2007 mark of €49.09 ($67.14), according to STR Global.
“Most expect stronger increases in demand for Madeira pushed by growth of Scandinavian, French and German tourists. Many also estimate that Lisbon, Algarve and Azores will witness growth,” Valles said.
Capital senses opportunity
“We’re targeting mid-size, unbranded 3- and 4-star (assets) in high-density tourist areas with a more or less fixed hotel room supply,” said Ana Gil-Costa, who along with sister Sonia Gil-Costa is co-managing director and co-founding partner of private equity firm Hoving Capital LLC.
Jordan spoke of a strong conversion activity in the region.
“A trend has been the rehabilitation for hotel use within the historic center of Lisbon and Porto. In the Algarve, conversions of 1960s and ‘70s seafront hotels are (also) expected,” he said, “but growth has outpaced demand and posed a challenge to RevPAR. Slowdown in supply and growth of arrivals should invert this.”
Gil-Costa said a lack of global brands keeps the sector un-professionalized, with most owners and operators lacking necessary competency.
“Even structurally, many hotel developments were not designed and built with operational efficiencies in mind. This presents a tremendous opportunity for a value-add investment strategy, since these unencumbered assets typically don’t come with a 20-year-or-longer management contract attached,” she added.
Iberian hurdles
Among problems still besetting Iberia are mass unemployment, continued cutbacks (Portugal announced yet more austerity legislation in November), sales-tax increases and the presence of non-competitive labor laws, despite the tourism sector in both countries enjoying political stability, fully developed infrastructure and efficient transportation.
With regional banks withholding development financing, sources of capital must come from elsewhere. Gil-Costa has seen significant transaction activity in Spain but not in Portugal.
Foreign institutional investors, most frequently high net worth individuals, held many of Portugal’s important hotel units, but “Portuguese investors, be they established hotel companies or (individual) players, continue to invest,” Jordan said.
He is hopeful for Lisbon, too, as well as Algarve, Portugal’s sunshine destination, seeing clear signs of confidence, with “expected growth coming from traditional markets but also from emerging ones with high-spend capacity, such as Brazil, Russia, Asia and Angola (a former Portuguese colony).”
Valles added that for Portugal, 70% of demand is external, with Germany and United Kingdom accounting for significant shares.
“One can infer from macroeconomics estimates underlying the 2014 Portugal State Budget that international tourism should grow between 7% and 8% next year, contributing to more than 14% of exports,” Valles said.
“Banking valuations seemed to have increased in the past few months, though (they) still show lower values than the same period last year, but it’s still too soon to say if we have already hit bottom last March/April or if a new downturn may be on the way,” he said.